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Citi Steps Back

Nation's largest financial company sells insurance division to Met Life.

Despite the financial world being inundated by a flood of fourth-quarter earnings over the past few days, it has been heightened merger and acquisition activity that has commanded most of the headlines. First, Procter & Gamble(NYSE:PG) unveiled plans to scoop up Gillette(NYSE:G) in a $57 billion stock swap deal that would create the world's largest consumer products company. Not far behind was Motley Fool Stock Advisor pick SBC(NYSE:SBC), which has invited aging parent AT&T(NYSE:T) to move back home.

Finally, Citigroup(NYSE:C) has joined the feeding frenzy, though, in an unusual twist, the financial titan will actually be shedding assets, rather than tossing another business into its own corporate shopping basket.

Yesterday, Citigroup announced plans to sell its Travelers Life & Annuity division to Met Life(NYSE:MET) for approximately $11.5 billion. According to the terms, Met Life will finance the transaction with $1 billion-$3 billion in company stock, and the remainder through a combination of cash on hand, debt, and possible asset sales (the company's reinsurance operations, for one, have already been singled out as a possible cash-raising candidate).

About six years have elapsed since the banking industry successfully lobbied Congress to repeal the barriers between commercial banks, brokerages, and insurers that were erected soon after the Great Depression (read the timeline, here). The company has grown by leaps and bounds since the landmark reversal, but Citigroup hasn't always been the nation's largest financial institution -- once upon a time it was just a plain old bank called Citicorp.

That all changed in April 1998 when Travelers CEO Sandy Weill orchestrated a $70 billion merger with Citicorp -- the world's largest at the time -- joining forces to create a financial behemoth with fully integrated (at least after the Glass-Steagall walls came crashing down a year later) insurance underwriting, commercial banking, and investment banking services. Then, for the first time, the one-stop shopper could make a checking account deposit, buy a life insurance policy, get a car loan, and place a trade in their brokerage account -- all conveniently under one roof. One could just imagine the cross-selling opportunities that would arise.

But not everything proceeded according to plan. A devastating bear market took a heavy toll on profits from the capital markets division. The insurance business, though it has been consistently profitable (especially relative to other insurers), has still not been on par with Citigroup's other units. After ringing up huge asbestos-related liabilities, the property and casualty division was spun off for $4.3 billion in 2002 -- signaling that the financial supermarket concept was showing cracks. Now, with the departure from insurance underwriting complete, the company has largely returned to its core banking roots.

With the sale, Citigroup may be getting the best of both worlds. It is exiting the insurance manufacturing business -- along with its inherently lower returns on equity -- but will still retain the Travelers product, which will be distributed through bank branches and Salomon Smith Barney brokerage offices. The company will also free up $6 billion that had been set aside for regulatory reasons, and pocket a tidy $2 billion profit. It wouldn't be surprising to see Citigroup -- with about $10 billion or so in cash headed its way -- shift directions and resume its acquisition binge.

For its part, MetLife may experience a few hiccups as it attempts to digest global operations that produced revenues and earnings of $5.2 billion and $901 million last year. The company will also have to suspend its stock-repurchase plans temporarily. However, the transaction, which is expected to be immediately accretive to earnings, will vault the company into position as North America's No. 1 life insurer, and also expand the company's international reach. Moreover, Met Life is gaining a valuable sales channel, as the deal includes a 10-year distribution agreement to market its products through Citigroup's retail networks.

Citigroup has, to a certain extent, returned to the path from which it first deviated seven years ago. Sandy Weill's vision may be remembered as an interesting experiment, but ultimately, as the venture slowly unravels, it yields a more valuable lesson: trying to be all things to all people is an undertaking not worth taking.